Use-It or Lose-It Rule Newly Modified:
Important Notice for Cafeteria Plans
By William G. Enck
Anyone who has participated in a cafeteria plan (Section 125 Plan) is familiar with the “use-it or lose-it” rule affecting benefits an employee receives under the flexible spending account portions of the plan (i.e., medical and dependent care reimbursement accounts). Currently, if an employee’s annual deferral amount under his or her reimbursement account(s) exceeds the actual medical or dependent care expenses incurred during a given plan year, the employee forfeits any remaining balance. The fear of losing benefits has caused many employees to limit the amount they are willing to contribute to Section 125 plans as pre-tax contributions and has deterred some employees from participating at all.
Rule Modification Means More Flexibility
Effective immediately, an employer can amend its cafeteria plan to change the rule to allow for a two and one-half month grace period immediately following the end of each plan year within which an employee can incur reimbursable expenses. This means that any qualified expenses incurred during the grace period may be paid or reimbursed from pre-tax contributions remaining unused at the end of the immediately preceding plan year. The effect of the grace period is to give a participant up to fourteen and one-half months to use the pre-tax contributions for a plan year before any amounts are forfeited under the use-it or lose-it rule. Furthermore, an employer may continue to provide a “run-out” period after the end of the grace period, during which expenses for qualified benefits incurred during the plan year and the grace period may be paid or reimbursed. Any unused benefits that remain at the end of the grace period (or run-out period) must still be forfeited.
Employer Action Required to Participate
This is a welcome change for employers and plan sponsors. Because it will only apply in those cases where the employer actually amends its plan, employers wanting to institute the new rules should do so by amending the plan document before the end of the current plan year. For calendar year plans this means that an employer has until December 31, 2005 to amend its cafeteria plan to incorporate the new grace period for 2005. Please don’t hesitate to contact the Berry Dunn Retirement Plan Solutions Group for more information or document amendment support.
The above is designed to give the reader a broad understanding of the new cafeteria plan benefit rules. Because the information is presented in summary form, we encourage you to seek further professional advice before taking action. Please call Bill Enck< at (207) 775-2387, or benck@bdmp.com for more information.
You can view and print a copy of the Treasury Release by clicking here: http://www.ustreas.gov/press/releases/js2456.htm